“Buy American” is a Negative Sum Game


The U.S. Senate has approved a temporary patch on the “buy American” provision in its $900 billion economic “stimulus” plan. After rejecting Senator John McCain’s (R-AZ) attempt to remove the language, the Senate approved adding “applied in a manner consistent with United States obligations under international agreements.” The basic provision will still increase the cost of construction and repair, reduce jobs intended by the legislation and harm U.S. efforts in getting other countries to reduce trade barriers.

The House and Senate legislation have almost identical provisions. The House bill says, “…all of the iron and steel used in the project is produced in the United States.” The Senate language includes “and the relevant manufactured goods” after the word “steel.” Exceptions are provided if the government agency finds it “would be inconsistent with the public interest; iron and steel are not produced in the U.S. in sufficient and reasonably available quantities and of a satisfactory quality; or inclusion of iron and steel produced in the United States will increase the cost of the overall project by more than 25 percent.” Note the entire project must cost 25 percent more, not the iron or steel in it. If the requirement is waived, the department or agency must publish in the Federal Register a detailed justification.

According to an analysis titled “Buy American: Bad for Jobs and Worse for Reputation” by Gary Hufbauer and Jeffery Schott of the Peterson Institute for International Economics, the steel industry could possibly gain 1,000 jobs from the House provisions while the broader Senate language could result in an additional 9,000 manufacturing job. The total U.S. labor force is about 140 million. U.S. steel manufacturing is capital intensive with 150,000 workers producing 100 million metric tons (MMT) per year prior to the current economic slowdown. The authors estimate the House stimulus plans will need about 0.5 MMT tons of steel. The Senate jobs impact is based on Administration estimates that the stimulus plan will created 220,000 jobs in manufacturing and an Office of Federal Procurement Policy estimate that 4 percent of federal spending on manufactured goods is for imported products.

Trading partners have already talked about retaliation. The U.S. steel industry exported about 9 MMT of steel in 2007 accounting for 14,000 jobs. A 6-7 percent cutback in steel exports due to trade policy changes would wipe out the extra steel employment from the buy American legislation. Hufbauer and Schott estimate that 12 major U.S. trading partners import about $104 billion per year in U.S. goods and services for government use. If only one percent of those purchases were eliminated by trade policy retaliation, that would result in the loss of 6,500 U.S. jobs. If two percent of the purchases were lost, those 13,000 lost jobs would exceed the potential 10,000 job gain. Of course the lost jobs would be spread through dozens of manufacturing industries and not seen like the concentrated jobs in steel.

The economic outcomes could be much worse. U.S. steel companies will charge higher prices for their steel because of less competition for stimulus related projects and other government work. Fewer roads and schools would be built and less other workers employed. Higher steel prices would bleed into non-government work and those products would be less competitive in world markets. Steel producers in other countries may lower steel prices and provide more competition against the U.S. in third country markets.

The Senate language is a major problem for the WTO Agreement on Government Procurement (GPA) and the procurement chapter of NAFTA. The U.S. has spent years negotiating changes in restrictive purchasing practices of other governments which could be undone by the Senate. The GPA includes the 27 countries of the EU and 12 others including the U.S. Hufbauer and Schott state, “In the absence of a reservation or exemption, the application of Buy American provisions to projects sponsored by entities covered in the GPA would violate U.S. obligations.” Chapter 10 of NAFTA on government procurement applies to the federal government, but not to states. The authors believe that the stimulus spending is covered because the federal government is providing funding for specific programs.

Hufbauer and Schott believe the biggest impact will be on U.S. foreign policy, “In a stroke, the United States would forfeit the moral high ground when it comes to slowing the protectionist juggernaut that now threatens the world economy.” They offer three options for dealing with the issue. The best is to delete the buy American provisions; that was rejected by the Senate. The next best is to keep the less restrictive House language, but state in the bill that the “public interest wavier” will be used to avoid violation of trade obligations. The third option is a statement from President Obama that the U.S. will honor its international obligations. The Senate kept the more restrictive language and added words on honoring obligations.

All of this activity is a huge waste of time. Legislating an increase in the cost of doing business is not the road to economic recovery. U.S. taxpayers and workers will be the biggest losers as they get less construction and repairs than they were promised and fewer workers are employed on projects. Jobs for lawyers will increase as they sue in the U.S. over what the law requires and lawyers from other countries file cases against the U.S. under WTO and NAFTA. That is a dead weight loss that the U.S. does not need.

And, worse legislation is waiting in the wings. Some members of Congress support a requirement that the $20 billion for computerizing medical records go only to American tech firms. That may be impossible to do with the global nature of the information technology business. At some point it may become obvious that trying to protect a segment of the U.S. economy at the expense of the general population never was a good idea and is even worse now.

Ross Korves

Ross Korves

Ross Korves served Truth about Trade & Technology, before it became Global Farmer Network, from 2004 – 2015 as the Economic and Trade Policy Analyst.

Researching and analyzing economic issues important to agricultural producers, Ross provided an intimate understanding regarding the interface of economic policy analysis and the political process.

Mr. Korves served the American Farm Bureau Federation as an Economist from 1980-2004. He served as Chief Economist from April 2001 through September 2003 and held the title of Senior Economist from September 2003 through August 2004.

Born and raised on a southern Illinois hog farm and educated at Southern Illinois University, Ross holds a Masters Degree in Agribusiness Economics. His studies and research expanded internationally through his work in Germany as a 1984 McCloy Agricultural Fellow and study travel to Japan in 1982, Zambia and Kenya in 1985 and Germany in 1987.

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